Silver prices have been in free fall over the last week, collapsing down to $17.60 on Monday and resting at 4 year lows. The daily sentiment index is now at 4%, meaning 96% of traders polled believe silver is going lower from here.
This is a very emotional time for many people that own precious metals in their portfolio. Investors love to buy assets when prices are high and they hate to own assets (or purchase more) when prices are low. It is one of the most fascinating parts of human psychology surrounding the financial markets, and it doesn't exist anywhere else in normal life (no one rushes out to purchase a TV because a store just promised to raise the price $2,000 for "one day only").
Silver trades like a technical beast. Stop loss triggers are set up on the charts, meaning computers are programmed to sell when prices reach certain levels. Professionals that know where these stops are clumped together, and have the ability to move the (extremely tiny) market downward in the short term, can push the price down to those levels and trigger the stop losses. It creates a cascading waterfall selling effect on the way down. It also washes away any sellers or stops remaining in the market.
The bearish argument is that the momentum is in your favor on the downside. The dollar has experienced incredible strength over the past few weeks and it looks like it has no signs of stopping.
Let's briefly walk back through the bigger picture more bullish supply/demand factors that may impact the market over the longer term.
Every year new industrial uses are created for the metal increasing the demand potential in the years ahead. As the Fed winds down its QE program for now, the dollar is strengthening which is hurting both silver and gold in the short term. However, precious metals trade on a global stage and while the Fed is tightening, Europe is just beginning a new QE program while Japan continues to unleash a steady stream of printed currency. China has experienced a $15 trillion growth in their credit markets since 2008, which is larger than the entire size of the U.S. financial system. While the U.K. temporarily has QE on hold, they (along with every developed country in the world) have interest rates at 0.0%. It is possible that some day we will wake and find that the world would like to own just a small percentage of their portfolio in currency that is not purposefully being devalued.
Silver is currently priced well below the cost of production which is taking a large chunk of the ready mining supply off the market and removing the potential for additional supply completely in the years ahead. Imagine trying to put together a group of investors to build a new mine knowing that what you take out of the ground will lose money. Investors will laugh at you and tell you to take your money and go fund a hot new app in San Francisco.
After a 65% drop in price over the past 4 years, silver has first been forgotten, then hated and now despised as an asset class. I was not buying silver on the way up during the last $17.50 to $50 run because I prefer to buy assets after major price declines when sentiment is washed out. I never dreamed this opportunity would appear again. Can it fall to $15, $10, $5 from here? Sure. This market has the potential to do anything in the short term.
I still believe, and I am probably the only person left on the planet today, that there will be consequences for the central banks policies over the last 6 years (which are still in effect today). The world now believes that there are no long term consequences for holding rates artificially low or printing money to stimulate the economy in the short term. They believe central banks are gods.
Maybe this time is different, but I'm betting with my portfolio that it's not.